The Gone Fishin' Portfolio: The Ultimate Index Fund Portfolio

When I speak about my Gone Fishin' portfolio at financial conferences around the nation, I often tell investors not to watch MSNBC, CNBC or any of the other investment networks.

Members of the audience sometimes find this comical - or even hypocritical - since I'm on these networks occasionally myself. But if you watch these channels regularly, I promise it will make you dumber and poorer.

Why? The underlying premise of these networks is that there is constant breaking news that you need to react to immediately.

Oil prices are up. What should you be buying? The Fed has cut rates a quarter point. How should you respond? Warren Buffett says the recession will last longer than expected. What should you be selling?

The financial media parades one so-called "expert" after another in front of you. Each offers different opinions on the economy and the markets. Is that because you'll profit by reacting to every government statistic, earnings release or economic forecast?

Of course not. The circus of activity is there to attract viewers. That keeps advertisers happy and the networks' bottom line growing. But as a viewer and investor, it costs you money.

Wall Street and the financial press spew out so much analysis and so many opinions each week, most investors lose sight of the big picture. And that's unfortunate...

6 Factors That Determine Your Investment Portfolio Value

In essence, there are only six factors that determine the long-term value of your investment portfolio.

Of all these factors, the only one you cannot control is the fourth. You cannot know with any certainty what stocks or bonds will return from one year to the next.

More sophisticated investors often say, "Well, of course no one knows for certain, but you have to guess."

No, you don't. And you shouldn't.

Rather than guessing or pretending you have answers to unanswerable questions - like what the stock market will do this year or where interest rates are going - you can use a "lazy" portfolio philosophy that allows you to capitalize on the uncertainty inherent in the markets.

A "Lazy" Index Fund Portfolio

I can't predict the future, and neither can you. That's why I created the Gone Fishin' Portfolio.

The portfolio is breathtakingly simple. All we do is divide our money among different asset classes - like stocks, bonds, precious metals and real estate investment trusts - and then rebalance once a year to bring each class back to our original percentage.

It works like a charm. The portfolio has beaten the S&P 500 every year, while taking much less risk than being fully invested in stocks.

We also back-tested the system through the bear market of 2000-2002. Again, it beat the market every single year.

That's what you want, an investment portfolio that holds up well when the markets are down - and sprints ahead when the market is moving higher.

Since its inception, The Gone Fishin' Portfolio has compounded at 17.3% a year. And this is an extremely risk-averse approach, making it the perfect home for what I call your "serious money."

Where It All Started

In 1990, Dr. Harold Markowitz won the Nobel Prize in Economics for his groundbreaking discovery of the math behind the Gone Fishin’ Portfolio. Although many of the concepts used by Dr. Markowitz are hard to understand, he won the award because he showed how investors can master uncertainty and, at the same time, generate excellent investment results.

You don’t even need a computer to implement this strategy. All the adjustments you’ll need to make to your portfolio can be done once a year – with a single 15-minute phone call. The rest of the time you’re supposed to go fishing or you can just spend your time however you choose. Because this strategy works.

Instead of struggling with trying to figure out when to get in and out of the market, do something simple: Spend 15 minutes a year on your Asset Allocation – a nominal amount of time when you consider the impact it can have on your portfolio and your life.

What Asset Allocation Is

Asset Allocation is the process of developing the most effective – optimal – mix of investments. In this case, optimal means that there is not another combination of asset classes that is expected to generate a higher ratio of return to risk.

And what does it consist of? Quite simply, it’s breaking down your portfolio into different baskets, or classes of investments, to maximize returns and minimize risk. As the cliche goes, “Don’t put all your eggs into one basket.”

So let’s take the first steps in breaking down your portfolio into baskets, or asset classes. By the way, an asset class is a group of securities that have similar financial characteristics. For the purpose of today’s letter, let’s focus on the five principal types of long-term investments – stocks, bonds, cash, real estate and precious metals.

How To Spread Your Eggs Around

Diversification is a strategy designed to reduce exposure to risk by combining a variety of investments, which are unlikely to move in the same direction. In other words, you don’t want to put all your money in investments that will perform similarly.

One of the best ways to diversify your portfolio is by placing your money into index funds. Because index funds are generally invested in a diverse portfolio of investments (an entire index), they provide the greatest degree of diversification. By owning several investments you lessen the chance that you’ll suffer if one or two of them drop in value.

Index Fund Portfolio Allocation

The Gone Fishin’ Portfolio allows you to put this strategy to work through the lowest-cost group of index mutual funds in the country,the Vanguard Group. Here’s how you would asset allocate your “Nobel Prize” portfolio:

Vanguard Total Stock Market Index (VTSMX) – 15%

Vanguard Small-Cap Index (NAESX) – 15%

Vanguard European Stock Index (VEURX) – 10%

Vanguard Pacific Stock Index (VPACX) – 10%

Vanguard Emerging Markets Index (VEIEX) – 10%

Vanguard Short-term Bond Index (VFSTX) – 10%

Vanguard High-Yield Corporates Fund (VWEHX) – 10%

Vanguard Inflation-Protected Securities Fund (VIPSX) – 10%

Vanguard REIT Index (VGSIX) – 5%

Vanguard Precious Metals Fund (VGPMX) – 5%

Notice that we have a 30% allocation to U.S. stocks. It is divided between small-cap and large-cap stocks. Likewise, the 30% allocation to international markets is evenly divided between Europe, the Pacific and Emerging Markets.

You might wonder how including some of these riskier assets – like emerging markets, gold and small-cap stocks – actually makes your portfolio less volatile. By combining these riskier – but non-correlated – assets, you actually increase your portfolio’s return while reducing its volatility.

[cfsp key="mid-content-callout"]

It is also important to note that the Gone Fishin’ Portfolio is not exclusive to the Vanguard Group. We selected Vanguard as our family of funds simply because they have the lowest expense ratios (in fact, for the moment, Vanguard has stopped admitting new investors to two of these funds). In an effort to maximize returns through Asset Allocation, reducing expenses with the Vanguard Group provides the best fund platform. But it can be used with any fund family.

If you’d like to imitate the above portfolio and don’t know where to start, Schwab is a good company to contact: www.schwab.com. Simply use the same percentage breakout as noted above for your Asset Allocation. Then select, from the list of funds available to you, the ones that most closely mirror the Vanguard funds.

The 8 Advantages of The Gone Fishin' Portfolio

There are eight primary advantages to using The Gone Fishin' Portfolio...

It prevents you from being too conservative or too aggressive, so your investments neither tread water nor blow up due to crazy risk-taking.

It eliminates shortfall risk, the risk that inflation will destroy your purchasing power over the long haul. (It keeps your index fund portfolio from kicking the bucket before you do.)

It requires no economic forecasting or market timing.

It eliminates individual security risk. (There is no chance of holding a WorldCom, Enron or any individual stock or bond that causes your investment portfolio to crater.)

It is exceptionally cost effective. You will do a complete end run around Wall Street, paying nothing in brokerage commissions, planning fees, sales loads, or 12b-1 fees.

It is based on the only investment strategy ever to win the Nobel Prize in Economics.

And, finally, it is so simple to implement, you can do it yourself in less than 20 minutes a year. (The rest of the time you are encouraged to travel, play golf, or "go fishin'.")

How does one investment system do all these things? I don't have the space to tell you in this column. But I wrote a book - out this week - that explains exactly how it's done.

It's called "The Gone Fishin' Portfolio" - and the subtitle says it all: "Get Wise, Get Wealthy... and Get On With Your Life."

This book is the distillation of the best things I've learned in 23 years as a research analyst, portfolio manager and investment advisor. (As I sometimes tell my readers, I've made the dumb mistakes so you don't have to.) I can save you a lot of time - and a boatload of money - by showing you to profit from my hard-earned experience.

The Best Reason For Using the Gone Fishin' Portfolio

However, I still haven't told you the best reason to use The Gone Fishin' Portfolio. The high returns and low risk are only the beginning.

You see, money is not your most precious resource. It's time. Your time is limited, perishable, irreplaceable and unlike money, cannot be saved.

The real beauty of the Gone Fishin' Portfolio is it allows you to redirect your time to high-value activities, whether it's work you enjoy, time spent pursuing your favorite activities, or just relaxing with your friends and family.

But, more importantly, it guarantees you peace of mind and the time to devote to the people and pastimes you love.

Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in their own securities recommendations to readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.